10/26/2011 @ 6:00PM

India's Murugappa Group: Prescription For Growth

A Vellayan, chairman of the Murugappa Group of Chennai, is on a quest for size. He’s aiming to nearly double revenues of his conglomerate, one of India’s oldest, from a current $3.8 billion, by 2014.

“We must have size. If you get to a certain size you have a self-protection mechanism,” says Vellayan, sitting at his corporate headquarters in Parry’s Corner, a Chennai commercial district.

The Murugappa Group already has several sizable winners in its basket: Coromandel International is the second-largest producer of phosphatic fertilizers in the country; TI Cycles is the second-largest maker of bicycles in India; and EID Parry is one of the top five sugar companies in the country. Murugappa is often referred to as the Tata of South India, a nod to its vintage, values and the diversity in its business portfolio. Vellayan’s idea of “self-protection” is the heft to wield bargaining power.

With a combined wealth of $1.02 billion, the Murugappa family, with 58-year-old Vellayan as the oldest member of the fourth generation, ranks No. 55 on the FORBES INDIA rich list. More than half of the fortune comes from agriculture-based businesses and a fourth from engineering units like TII, which makes steel tubes (as well as those TI bicycles), and CUMI, a world player in abrasives versus 3M and a subsidiary of France’s Saint Gobain.

In the past decade Murugappa, like Tata, has been spreading its wings globally, though not in businesses likely to draw popular attention. It has manufacturing bases in Russia and China for abrasives, in France for industrial-class chains and in South Africa for fertilizer inputs.

All this has whetted Vellayan’s appetite; he’s constantly looking to boost each business segment–either through acquisitions, raw material linkages or joint ventures. (It has linked with Cargill in sugar.) The group has a $400 million kitty for expansions and acquisitions. A team is scouring the globe for takeovers.

Insiders say that ever since Vellayan (he is a Murugappa descendant, but he does not carry the Murugappa surname–his last name is Arunachalam, from his father) became chairman in 2009, he’s been pushing the group to dream bigger. The rule of thumb is three times GDP growth for the group as a whole. “He’s a big thinker,” says V. Ravichandran, a nonfamily lead director for fertilizers and sugar on the group’s corporate board, who has worked directly with Vellayan for nearly ten years. “It’s not just about setting goals, he also rallies people around the vision. There’s a lot of empowerment and a lot of trust.”

Since last year Vellayan has started holding two annual investor meets, one in India and one abroad. As a result the 111-year-old group, which has maintained a low profile in the past, is lately gaining more visibility. “In the next few years Murugappa will emerge in the top quartile of business houses in India,” predicts Harsh Dole, vice president at IIFL Cap of Mumbai, the institutional equities division of financial services outfit India Infoline. “They have vertical integration in key businesses. The platform for growth has been established. The systems and the people are in place, and most importantly, their internal cash flows are adequate to fund their growth plans.” (Murugappa also has bank loans.)

The group has made a habit of buying lossmaking units and turning them around. “We believe that when there are dips in the economy there’ll be opportunities,” says Vellayan. India’s economy has slowed along with others in 2011. This year the company bought a crop-protection manufacturer in Gujarat state for nearly $100 million.

Vellayan’s approach to turnarounds is simple. “It all starts with cost management. We look at import substitution. We try to understand the value chain and understand our natural strengths,” he says.

He did that when he sent a team to Foskor, a South African supplier of phosphoric acid to the group’s fertilizer company. Vellayan put in place a team that increased production by 27%, and Ebit went from a loss of $22 million in 200405 to a profit of $122 million in 200708. The group came out with a 13% stake and a five-year supply contract.

But for all its forays the Murugappa Group remains only a third of the size of, say, a Mahindra & Mahindra in terms of revenues. Its portfolio of companies remains primarily those in agriculture, old-economy manufacturing and financial services; it hasn’t grown as fast as other groups that have expanded into sectors like infrastructure and telecom. A recent attempt with DBS of Singapore to expand an Indian retail-finance business went sour.

Vellayan has his own prescription for growth. “We will not take wild potshots. We have to grow around our skill sets,” he explains. “It’s a business that has been built over generations.”

The Murugappa Group traces its history to 1900, when Dewan Bahadur A.M. Murugappa Chettiar, the founder, started a moneylending firm in Burma. In 1935 the family shifted to India right before the Japanese invasion of Burma. After that it entered a variety of businesses from sandpaper to manufacturing safes to insurance. Today 10 family members–all male–are part of the 32,000 employees.

Vellayan was always groomed for business. After studying in Chennai (then Madras) until fifth grade, he was shipped off to boarding school in north India. “When the train (leaving Tamil-speaking Chennai) crossed a certain station I didn’t know the language,” he admits. “I was lost.”

But the Doon School–whose alumni include former Indian prime minister Rajiv Gandhi and writer Vikram Seth–toughened him up. From climbing craggy rocks on the Rohtang Pass to whitewater rafting in the Doon Valley, he did it all. The three years that followed at New Delhi’s Shriram College for his undergrad degree helped him hone his Hindi. His father thought that as a South India-based businessman he needed to learn Hindi to navigate New Delhi’s bureaucracy.

Vellayan got his career start in London in 1968, working as a graduate trainee with the group’s joint venture partner in the tube business. An M.B.A. from the University of Warwick followed, after which he returned to Chennai in 1972, ultimately heading up the TII unit (Tube Investments of India). He led in the acquisitions of a German chains plant in 1994 and a Japanese tube plant in 1995. (A tube foray into Suzhou, China in 2007 did not go well. Pricing issues led to a $9 million loss by the exit in 2010.)

The group built the fertilizer business, beginning in the late 1990s, and after domestic consolidations and foreign-supply deals it now brings in $1.7 billion in annual revenues.

Now, as chairman, Vellayan is looking not only to reach a commanding size but also to groom the next generation. Succession is no sure thing: Murugappa kin, including two of Vellayan’s sons, go through the same human resources sieve as other employees, with annual reviews and career development assessments. Currently all the major businesses in the group but one are led by nonfamily professionals, and the clan holds only two of eight group board seats in the Murugappa corporate board.

Meantime, Vellayan travels at least one week each month. He relies on his daily dose of exercise–a 45-minute walk–whichever city he is in, whether London, Delhi or Chennai.

Vellayan is also big on sports. For instance, when Tata pulled out as sponsor of a professional tennis tournament in Chennai in 2004 Vellayan stepped in, teaming up with schoolmate and tennis ace Vijay Amritraj to keep the balls in play. “He put his shoulder to the wheel, and the event’s been a wonderful success,” says Amritraj. “What Vellayan always had very much in his corner is his skills with people. He can talk to anyone and everyone.”

It’s a trait that company insiders also love. “I am just not a social animal,” says Ravichandran, the non=family director. “When I was at Coromandel he [Vellayan] used to do all the socializing for me.”

Music also rejuvenates Vellayan. He has a collection of 2,000 songs ranging from Middle Eastern to Tamil to Western country music, all depending on his mood. Likely to continue as chairman until he’s 65, the retirement age for all group-level executives, he surely needs his rechargers. “We’re aiming to be number one in what we are doing, regionally, nationally or internationally,” Vellayan says. “That’s a big challenge for me.”